Revealing insights from SSgA report on ESG adoption – ERISA perspective

State Street Global Advisors (SSgA) recently released a research report entitled, Into the Mainstream – ESG at the Tipping Point. It begins with a salient point: “ESG may well be becoming a mainstream trend, but every institutional investor – from pension funds to endowments to sovereign wealth funds – faces a unique mix of forces pushing them towards, or pulling them away from, ESG investing.” Indeed, asset owners and their managers are in fact subject to distinct standards of care, with ERISA’s fiduciary duties being the ultimate. In reviewing this report of global institutional investors’ reasons for addressing environmental, social and/or governance (ESG) factors in their investment decisions, and their reasons for not doing so, I considered the implications for ERISA fiduciaries, as “pension funds” were one of the institutional investors surveyed (along with endowments, charities, sovereign wealth funds and others). Consider also some of my prior analysis on the interplay of fiduciary duties under ERISA and ESG issues.

Here are the key takeaways:

  1. Fiduciary Duty: A Hurdle or Affirmative Duty to Incorporate ESG? A longstanding, significant obstacle to adoption of ESG by ERISA plans was whether it could be done in a manner consistent with ERISA’s fiduciary duties. The duty of prudence (Section 404(a)(1)(B)) has been the primary area of concern under an ERISA/ESG analysis, but duty of loyalty (Section 404(a)(1)(A)) and diversification (Section 404(a)(1)(C)) issues may also arise depending on the circumstances. Interestingly, the SSgA findings indicate that 46% of those surveyed viewed fiduciary duty as a push factor – i.e., an affirmative duty. If we drill down, the % of respondents who cited fiduciary duty as a lead push factor was highest in North America. If we drill down further, we see that, 41% of pension funds view ESG as a fiduciary duty. So, while pension funds seem less likely to view ESG as an affirmative fiduciary duty relative to other institutional investors, the fact that 41% do is notable. Again, this picks up pension funds globally and appears to cover private (i.e., ERISA) and public (i.e., governmental) plans.
  2. Risk Mitigation or Opportunity? The results also show that ESG risk mitigation is, at this point, (much) more of a basis/push factor to incorporate ESG factors into an investment decision than outperformance reasons (in North America, 42% (of all respondents – not just plans) cited risk mitigation vs. 1% who cited ESG as a way to generate higher returns). Various other studies make the point that ESG can present both mitigation and return opportunities, so it is interesting that institutional investors have gravitated toward mitigation rather than return. Perhaps lack of standardized disclosures and metrics is a reason, but it would seem that would affect both downside risk and return on any given investment. Perhaps another reason is that the outperformance takes longer to materialize. The DOL has reiterated that integration is examined under the regular prudence test and not the heightened tie-breaker test.
  3. Obstacles: A continuing theme, now picked up by this new SSgA report, is that the lack of standardized and transparent ESG data remains a primary obstacle to adoption (e.g., inconsistent scoring across the various providers). SSgA, in this report and over time, has helpfully examined the correlations of the major data providers in terms of a specific company’s ESG coverage. In one example, the ratings of companies by two prominent providers had a correlation of (only) .53. The lack of expertise in ESG was also cited as a top reason for not incorporating ESG factors – a valid reason for not making a particular investment under ERISA (fiduciaries are not expected to be all-knowing, but are expected to seek outside expertise when doing so would be prudent). Perhaps this explains why more and more ESG-related questions are showing up on questionnaires sent to investment managers.
  4. Governance: Respondents reported better measurement of governance (G) factors than environmental (E) or social (S) factors. For ERISA fiduciaries using integration, an analysis/documentation of how the respective E, S and/or G factor affects performance is important under DOL guidance. It is also important for investment managers and appointing fiduciaries to be clear on whether one or more E,S or G factors will be incorporated for any particular mandate, and to confirm that doing so would be in accordance with plan documents.

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SEC Proposals Would Modernize Investment Adviser Advertising Rule & Expand the Cash Solicitation Rule

On November 4, 2019, the Securities and Exchange Commission (Commission) voted seriatim to issue proposed amendments to the rules under the Investment Advisers Act that prohibit certain investment adviser advertisements offering a more flexible principles-based approach, permitting, notably, testimonials and endorsements under certain circumstances. The proposed amendments, if adopted, would likely be welcomed relief to the industry, which has clamored for modernization of the advertising rules for years. The Commission also proposed amendments that would broaden the current cash solicitation rule to apply regardless of whether an adviser pays a solicitor cash or non-cash compensation and would apply to the solicitation of current and prospective investors in private funds.

Investment adviser advertisements

The proposed advertising rule: (i) modifies the definition of “advertisement,” including adding to the types of communications to cover broadcasts that are not live (e.g. webinars); (ii) replaces the current four per se prohibitions with a set of principles that are reasonably designed to prevent fraudulent or misleading conduct and practices; (iii) provides certain additional restrictions and conditions on testimonials, endorsements, and third-party ratings; and (iv) includes tailored requirements for the presentation of performance results, based on the sophistication of the intended audience (i.e. includes a new category of “non-retail” investors comprised of qualified purchasers and knowledgeable employees). The proposed rule also would require internal review and approval of most advertisements by a “designated employee.” It also would require each adviser to report additional information regarding its advertising practices in its Form ADV, which appears largely designed to assist examination staff.

Replacing the current strict prohibitions with a more flexible principles-based approach will be gratifying to the industry, which has requested such modernization for years. Under the proposal, for example, testimonials and endorsements would be permitted so long as the advertisement meets general anti-fraud type prohibitions, subject to certain disclosures about the person giving the testimonial or endorsement and any cash or non-cash compensation paid by or on behalf of the adviser. Similarly, the proposed rule replaces the prohibition on past specific recommendations with a “fair and balanced” approach, which also incorporates the sophistication of the intended audience. This should be welcomed by private fund advisers, particularly in the private equity context, where case studies are particularly helpful in explaining the adviser’s investing approach. Less welcomed for private fund advisers is that the proposal would specifically include private fund adviser advertising in scope despite the acknowledged “overlap” with current rule 206(4)-8.

Payments to solicitors

The proposed amendments would broaden the current cash solicitation rule to apply regardless of whether an adviser pays a solicitor cash or non-cash compensation (including free or discounted services, directed brokerage and awards or other prizes) and would apply to the solicitation of current and prospective investors in private funds. The Commission recognized that the broader rule could have unintended consequences. For example, to avoid capturing investors who participate in “refer-a-friend” programs, the proposed rule would add an exemption for certain de minimis compensation (i.e. $100 or the equivalent in non-cash compensation in a 12-month rolling period). The proposed amendments eliminate certain process and disclosure requirements but include additional disclosure about a solicitor’s conflict of interest.

SEC Proposes More Changes to Proxy Voting Process

Yesterday, the Securities and Exchange Commission (Commission ) voted 3-2 (Commissioners Jackson and Lee dissenting) to propose amendments to rules under the Exchange Act in connection with the ongoing review of the proxy process. The proposed amendments would impose additional requirements on proxy advisory firms that provide recommendations on votes and would raise the eligibility and resubmission thresholds for shareholder proposals:

Amendments to exemptions from the proxy rules

Among others, the proposed amendments would condition the availability of certain existing exemptions from the information and filing requirements of the federal proxy rules for proxy advisory firms on compliance with certain additional disclosure, including disclosure of material conflicts of interest in voting advice (not just to their clients). The proposed amendments also would provide registrants opportunities to review and provide feedback on reports before a proxy advisory firm disseminates its votes to institutional investor clients, regardless of whether the advice is adverse to the voting recommendation of the registrant. The Chairman asserted at the open meeting that the proposal is intended to incentivize the registrant to file its definitive proxy statement earlier, thereby allowing more time for the proxy advisory firm and its clients to formulate and consider voting recommendations, because registrants who file earlier (45 days or more in advance of shareholder meeting) have more time to review the proxy voting advice than those who file later (25-45 days in advance). In addition, the proxy advisory firm would be required to provide a final notice of voting advice no later than two business days prior to delivery of the advice to clients. The registrant thereafter would be permitted to include a hyperlink to its views on the voting advice in the report delivered to clients. This proposal also would add examples of when the failure to disclose certain information in proxy voting advice could be considered misleading under the proxy rules.

Procedural requirements and resubmission thresholds

These amendments would update the shareholder proposal rule, which requires issuers subject to the federal proxy rules to include shareholder proposals in their proxy statements, subject to certain procedural and substantive requirements. The amendments would revise the current eligibility requirements, the one-proposal limit and the resubmission thresholds.


To initially submit a shareholder proposal, a shareholder would need to hold at least $2000 or 1% of an issuer’s securities for at least three years, rather than the current one year holding period. Those with larger ownership stake could satisfy the eligibility standard in less time. In addition, shareholder proponents would be required to be available to meet with the company to discuss the proposal.

One-proposal limit

The proposed amendments would apply the one-proposal rule such that a shareholder proponent would not be permitted to submit a proposal in her own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting (and similarly, a representative could only submit one proposal at a given meeting, even if the representative submits each proposal on behalf of different shareholders). Commissioner Roisman alleged at the open meeting that this process had been “misused” in the past by proponents wishing to submit multiple proposals at the same shareholder meeting.

Resubmission threshold

The proposed amendments would raise the current resubmission thresholds of 3%, 6% and 10% for matters voted on once, twice or three or more times in the past five years to 5%, 15% and 25% respectively. In addition, the proposal would allow an issuer to exclude a proposal that previously has been voted on three or more times in the past five years, even if the proposal received 25% in its most recent resubmission if the proposal: (1) received less than 50% of the votes cast and (2) experienced a decline in shareholder support of 10% or more. Commissioner Lee’s dissenting statement asserted that the amendments would “suppress” the exercise of shareholding rights with regard to ESG issues, including in particular climate-related proposals which made up more than half of shareholder proposals in recent years.

All of the proposals are subject to a 60-day public comment period. We will be following up in the near future with more detailed analysis of the proposals.